Lease-purchase may be the answer to a struggling real estate market

A few months ago, Urban Studies theorist Richard Florida floated several suggestions for remedying the current real estate crisis. One of these was that banks should be encouraged to rent foreclosed homes to their former owners. While this plan violated the classic nugget of wisdom that banks don't like to be landlords, its potential for improving the current situation made it tantalizing.

In many ways, the emerging lease-purchase market fulfills the promise of Florida's plan. Pride of Ownership, an Atlanta firm, renovates and rents out foreclosed homes. Tenants agree to lease for three years. At the end of that period, they have the option of buying the home or moving on. If they choose to buy, they can use half of the rent that they paid during the lease period as a down payment. By giving tenants a shot at traditional loans, the company helps them enter the housing market as solid borrowers, with a better chance of success.

A major benefit of the lease-purchase plan is the fact that it can stabilize neighborhoods. As Latif Lewis noted a few months ago, one of the groups hardest hit by the foreclosure crisis is non-foreclosing homeowners. As banks foreclose on properties and former homeowners move out, neighborhoods fill up with neglected properties. At best, lawns go unmowed, hedges go untrimmed, and windows get broken. On the rougher end of the spectrum, robbers break in, pipes and fixtures are stolen, vandals mark houses with graffiti, and squatters take over. All told, empty houses bring down property values and encourage crime, creating a spiral of distressed, unsellable properties that discourages new tenants and encourages abandonment.

By encouraging tenants to occupy foreclosed homes, Pride of Ownership provides a soft cushion for falling home values, slowing down or even halting the cycle of foreclosure, neglect, abandonment and flight that could easily transform neighborhoods into ghost towns. In the process, it is also ensuring that property taxes continue to flow into civic coffers, helping to stabilize local economies. This, in turn, helps shortcut the kind of bleak decisions that cities like Youngstown, Ohio, had to make last year when it decided to raze 1,000 abandoned homes.

For a long time, the foreclosure issue has been painted in simple, black-and-white terms. In one narrative, the greedy bank seduced gullible home buyers with cheap credit and exotic loans. Now that they can no longer pay, evil Mr. Potter is throwing them out on their ears. In another narrative, greedy irresponsible homeowners bit off more than they could chew and are now demanding unfair government assistance to help them cheat the system.

While both of these perspectives have a grain of truth, they are also seriously flawed. After all, even the most predatory banks don't want to become landlords or lose money on empty properties. Conversely, the vast majority of distressed homeowners wanted nothing more than to raise their families in nice homes. Foreclosure will hurt both groups as banks lose money on failing properties and eviction leaves families scrambling for places to live.

The situation struggling homeowners find themselves in now, waiting for the other shoe to drop as backed-up credit departments take months to process the foreclosure paperwork, isn't ideal, either. For many homeowners, foreclosure is an inevitability, and the sooner it can be hastened along, the sooner they can move on with their lives. By offering an option that maintains home values, keeps evicted families off the streets, and may even offer the hope of future home ownership, lease-purchasing could hasten the resolution of the current real estate crisis, offering families a viable option, banks a continued flow of income, and governments a chance to breathe.